Last Friday the NCUA liquidated another small credit union. It’s the sixth credit union liquidated this year, and all of these credit unions have been very small. This brings up an interesting question: should you trust a tiny credit union with a large deposit?
What is a tiny credit union? In the case of the credit union that was liquidated on Friday, it had $13 million in assets and 3 employees. Its name was Lynrocten Federal Credit Union, and it had one office located in Lynchburg, Virginia. This credit union was actually the largest credit union liquidated this year. The other five had sizes that ranged from $3.4 million in assets to $169,000 in assets.
Why would you want to join such a tiny credit union? Many of these liquidated credit unions had offered top rates. For example, Lynrocten FCU was offering a reward-type checking account with a 2.50% APY. These tiny credit unions aren’t easy to join due to their narrow fields of membership, but if you find a way to qualify, you may get some good deals. However, you’ll need to decide if you trust that credit union to hold your savings.
It should be noted that members who kept their balances under the NCUA coverage limits didn’t lose any of their deposits. In many of the credit union liquidations before this year, the NCUA often has found another credit union to assume members’ deposits. This is similar to what the FDIC has done for the vast majority of banks that have failed in the last five years. In these cases, there’s no loss on deposits, even deposits above the coverage limits. However, the six credit unions that have failed this year did not have another credit union to assume deposits (Correction: One credit union did get absorbed by another credit union five days after the liquidation.) So if any member had deposits over the NCUA coverage limits, those deposits may have been lost. In addition, the members had to wait before they received access to their deposits. The NCUA press releases didn’t provide the details about how long, but based on this sentence from the press releases, it is taking the NCUA a week just to contact the members:
NCUA’s Asset Management and Assistance Center will issue correspondence to individuals holding verified share accounts in the credit union within one week.
If you don’t want to go through this type of closure, you’ll want to be careful about the credit union you choose. You can review an institution’s financial health to see if it’s having financial problems that could result in a closure. For banks that have failed, almost everyone had poor financial ratings. In the case of DepositAccounts.com, this means one star (out of five). The credit unions that have failed have been more complicated.
For the case of the most recent failure, Lynrocten FCU had five stars from Bankrate.com, BauerFinancial and even from us at DepositAccounts.com. So why did the credit union fail? According to a Credit Union Times article on this liquidation:
Earlier in the week, local print and broadcast media reported that local police were investigating allegations from members that money was missing from accounts and loans were made from their accounts without their knowledge.
There may have been criminal activities at the credit union that caused the NCUA to liquidate it. This would explain why the credit union was liquidated when it had such healthy financial numbers.
Are small credit unions more likely to be closed due to criminal activities? When there are only three employees and only $13 million in assets, one employee can have a significant impact on the credit union. Also, it would seem like these small credit unions would have a more difficult time to ensure proper checks and balances. Small credit unions may not have the resources to hire experienced management who can develop processes and internal audits to ensure the credit union is operated in a safe and sound way.
So how big do you want your credit union or bank to be for you to feel that your deposits are safe? Are 10 employees enough? Or do you only care about NCUA or FDIC insurance?